In the summer edition of Real Estate Capital – which you can download in full here – and on www.recapitalnews.com this week, we explored the challenges and opportunities facing participants in the French real estate debt market.
As part of the coverage, participants in our first virtual roundtable discussion conceded we are unlikely to see a repeat of 2019’s strong market performance. However, we also heard that the uncertainty caused by covid-19 could lead to a reshaping of France’s real estate debt and equity markets. Here are some of the key talking points:
France entered the crisis in strong form
Our analysis showed France had a bumper 2019. Transactions data provider Real Capital Analytics put last year’s investment volumes at a record €41.6 billion – up 7 percent from 2018. Granted, all of Europe did well last year due to the volume of capital seeking buying opportunities. But RCA cited Paris as the best-performing European city. More than half of investment was by foreign buyers, including a strong showing by South Koreans. Although sources concede Brexit uncertainty in the UK was a factor, most argue Paris – which is subject to a huge ongoing infrastructure upgrade – topped many wish-lists on its own merits.
This year will be a damp squib in comparison, although one participant predicted the saving grace will be domestic capital, with a focus on core Parisian stock.
There is confidence in France’s fundamentals
Asked for the unique selling point of French real estate, against the backdrop of the pandemic, sources cited the market’s depth and liquidity, the country’s major investment in infrastructure and social security measures which could support the population during a downturn. The provision of real estate finance will be crucial to the smooth running of the market through the crisis, and sources reported that many debt providers are wrangling with repricing and rethinking their risk appetite.
The crisis will accelerate diversification
Unlocked potential within the non-bank lending market was cited by some as a determining factor to the liquidity of the French market this year. Historically competitive pricing from French banks has made it difficult for local debt funds to make headway. Before a 2018 change in legislation, non-bank lenders were unable to directly originate loans. Also, foreign debt funds have struggled to hit the returns needed to compensate for the risk posed by France’s borrower-friendly loan security regulations. Sources believe this crisis presents alternative lenders with the opportunity to provide liquidity and leverage outside of the banks’ reduced risk parameters.
Finance is focused on the mainstream
A December 2019 paper by research body Institut de l’Epargne Immobilière et Foncière and consultancy PwC showed most French real estate finance is concentrated in low loan-to-value transactions, in sectors considered safe – at least pre-covid – such as offices, largely around Paris. Sourcing financing for alternative property types will be a challenge in post-coronavirus France, one residential-focused source predicted. However, if debt capital sources diversify, less mainstream segments of the market may start to look interesting to some.
Fire sales are not expected
There will inevitably be some distress in the French real estate finance market, sources conceded, although lenders are unlikely to resort to accelerating loans or off-loading problem debt, one French market veteran argued. French banks, institutions and insurers, the source said, have previously often responded slowly to disruptions, choosing to hold positions until markets recover instead. The source argued that was their reaction in 2009 and is likely to be the same now.
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